An airline that doesn’t overbook

One of the most basic tools in yield management is overbooking. For any service provider, capacity is perishable. Having an airline seat, restaurant table, or doctor sit idle is expensive so if you cannot be certain that every scheduled passenger, diner, or patient is going to show up, overbooking reduces the chance that capacity goes unused. Indeed, we have had a number of posts on overbooking over the years.

Because it doesn’t overbook, JetBlue enjoys the lowest rate of involuntary denied boardings in the industry: only 18 people out of 21.3 million passengers through the first three quarters of 2013, the latest period for which data are available. Virgin America, with a bump rating close to JetBlue’s, oversells only on certain flights and usually limits the number of seats directly to the number of no-shows it expects in coach, spokeswoman Jennifer Thomas said in an e-mail. On the other end of the spectrum, Southwest subsidiary AirTran Airways had the highest rate among U.S. non-regional airlines required to report oversales, with 1.28 passengers bumped for every 10,000 travelers (or 1,800 customers in total during the period).

Several analysts expressed puzzlement over why JetBlue has avoided a common industry practice that can tip a particular flight’s financial performance from loss to profit. The airline also doesn’t advertise its practice, so most people are unaware that it doesn’t overbook—including at least one Wall Street analyst who covers the company. “It’s a bit of a head-scratcher,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. “It’s all about the extra few hundred dollars that can turn a flight profitable, especially when it’s relatively free money.”

It is worth noting that airlines as a whole are really really good at overbooking. As BusinessWeek notes, they have all sort of data on how no-show rates vary with flight characteristics (see also here). Further, there are characteristics of plane travel that make managing overbooking easier than other services. A medical clinic can overbook but has to deal with a small numbers problem. Booking two patients for one slot exposes the clinic to a significant risk of either having both patients show up or neither patient show up. Planning at the level of 150 passengers on a plane greatly increases the chance of perfectly nailing the number of no shows. Also, it is also easier to accommodate excess customers. If there is one passenger too many trying to get on the plane, one person has to be compensated. Having one too many patients in a doctor’s office can delay multiple patients until there is a break in the schedule that allows the clinic to catch up. So in that sense, overbooking is almost found money.

So why does JetBlue not overbook? A company exec in the article states that because they fly point-to-point routes, relatively few passengers have connections and that reduces their no show rate. Said another way, their passengers are less exposed to risks that are beyond their control that lead to no shows. That also suggests another point: They primarily serve leisure travelers who are less likely to have their plans disrupted by shifting meeting schedules.

Company reps also make the argument that JetBlue aims to bring “humanity back to air travel” and bumping passengers goes against having a kinder, gentler airline. This is actually something one can model. Overbooking is just a newsvendor problem in which the opportunity cost of flying an empty seat is weighed against the cost of accommodating a displaced passenger. JetBlue is, in effect, arguing that the goodwill cost of bumping passenger is very high if you have built your brand around better service. Pick a sufficiently high goodwill cost, and not overbooking at all is the optimal solution.

Of course, all that savings in goodwill costs never shows up directly in financial statements which is why the decision can always be second guessed by business reporters and analysts.

Related

3 Responses

Then they should market the heck out of this fact. They should doubledown and market something along the likes of “We’re so confident you’ll never get booked, we’ll fly you for free for the rest of the year.” Easily worth it’s weight in marketing gold and ostensibly goodwill. KSM ’07

Or, perhaps they have neither the technology or expertise to do this correctly. The issues they mention which might reduce no-shows are just inputs into the analytics which can be “tuned” to meet each flight’s specific characteristics. Overbooking allows airlines to offer seats, rather than show no availability, to those extra few passengers that need them, and this can be seen just as positively as their low-bumping statistics.